What Is A Bespoke Tranche Opportunity? Pros And Cons Of Bespoke Tranche Opportunity

Bespoke Tranche Opportunity

Bespoke Tranche Opportunity is a structured financial product and it is just another name of collateralized debt obligation (CDO). Bespoke Tranche Opportunities was formally known as bespoke CDO and it is something that a dealer produces to meet the requirements of a specific group of investors. Here, the investor buys a single tranche of the bespoke CDO and the remaining tranches are owned by the broker. Later, the broker uses other types of financial instruments such as credit derivatives to privet against potential losses.

Key Takeaways

  • BTO is a type of CDO and it is the accumulation of various assets
  • The three main part of BTO are mortgages, bonds, and loans
  • Over the last few years BTO has become a very popular practice among banks like Deutsche Bank AG, Citigroup Inc., Goldman Sachs Group Inc., etc.
  • You should keep in mind that there is no secondary market for bespoke CDOs  

What Is A Bespoke Tranche Opportunity?

Bespoke Tranche Opportunity is also known as BTO and it is a type of CDO which is an accumulation of various assets. The Bespoke Tranche Opportunity usually consists of mortgages, bonds, loans, etc. Bespoke Tranche Opportunity is a great option for small investors because it allows the small investors to buy a single tranche from a complete bespoke tranche. A tranche is a single part of accumulated assets. Usually, the tranche is separated from the others based on their specific features. When an investor purchases a single tranche, the dealer holds the remaining tranches. Dealers hold those tranches to safeguard investors at the time of losses/crises. Janet Tavakoli, president of Tavakoli Structured Finance LLC. says – 

“A tranche is, if you will, a slice of the risk, you’re going to pick one specific tranche. If you want to have AAA- and AA-rated assets, you’d expect those to go to money market funds, some bank portfolios, or people using them as collateral for another deal”

Nowadays, many large banks are trading bespoke tranche opportunities including Citigroup Inc. (ticker: C), Deutsche Bank AG (DB), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), etc.

Background Data Of Bespoke Tranche Opportunity

The BTO is one of the most structured monetary products of Wall Street. There was a huge market crash in 2007-2008 and since then the Bespoke Tranche Opportunity is the major contributor to that crash. BTO has a perfect but complex structure therefore it is a bit difficult for common investors to understand it. Therefore, most of the investors and dealers are not able to evaluate BTO properly and the right way. In 2015, a movie was produced based on the origin and the influence of bespoke tranche opportunity.

This film explained the financial crisis of 2007-2008 from the view of four groups of finance guys. These guys predicted and bet on the collapse of the credit and housing markets of 2007-2008. Some key reasons for that collapses were collateralized debt obligations (CDOs), packages of mortgage loans legally put together by banks, etc. CDOs were sold to investors and those investors were so excited about the high returns. So, the demand for CDOs was increasing and the banks started to issue bad mortgage loans. Issuing of bad mortgages was creating high risks because there’s a greater chance that borrowers won’t be able to pay them off. 

Many homeowners were not able to pay the mortgages and they had to give up the houses. This resulted in more supply than demand in the housing market and it led to the crash of the market. The market crash also resulted in people didn’t want to buy CDOs. Therefore, the banks had to adjust the CDOs and they stuck a new name on the packages: “bespoke tranche opportunities” (BTOs). BTOs are quite similar to CDOs and still, BTOs rely on banks and investors to take dangerous risks for higher returns.

Difference Between BTO And CDO

In many ways, BTO is similar to CDO because the branding of BTO comes from CDO. In BTO the investor will receive money according to the amount invested in a sort of tranche. On the other hand, CDO comprises different types of loans taken by people. So according to CDO, the investor will receive the profit depending on the tranche that they invest in and according to the payment made by the person who has taken the loan. Therefore, it is clear that AAA-rated tranche will receive less return because they are more secure. Therefore, BTO differs from CDO only in the context.

In BTO the broker will ask a client where they intend to invest. Here the client or the investment manager can only select the kind of asset to invest in. According to the BTO, you will only be able to invest one tranche. Moreover, BTO is a side of a very high leverage senior, a super senior tranche of a CDO. BTO has a link to a bespoke portfolio and it involves the use of a derivative like a Credit Default Swap. Some key points of Bespoke Tranche Opportunity are – 

1. Bespoke Tranche Opportunity is created by the dealers and it is created to suit the investors’ specific characteristics required.

2. Investments on BTOs usually happen in the Credit Default Swaps (CDS).

3. BTO is the result of hedge funds and investors that invest in huge institutions.

4. The return rates of tranches are not fixed and it varies depending on the tranches.

5. The single tranche opportunity is evaluated based on creditworthiness.

6. The BTOs trading is Over the Counter (OTC).

What Products Are Included In Bespoke CDOs?

Usually, Bespoke Tranche Opportunities include quite a few products. They are – 

1. Mortgage Loan

2. Mortgage-Backed Security

3. Collateralized Debt Obligation (CDO)

4. Credit Default Swap (CDS)

Mortgage Loan

A Mortgage Loan is a type of loan that people usually take when they want to buy a house but don’t have money. Mortgage Loans are usually long-term with a fixed interest rate and recurring payments. If you take a mortgage loan then you have to make recurring payments throughout the loan’s duration. Usually, the loan payments mostly consist of interest. For example, if you make a $2000 monthly payment, then around $1400 will go toward interest and only $600 will go toward the main balance that you owe on the loan.       

Mortgage-Backed Security

A mortgage-backed security is a set of individual main street loans. This type of security is created by investment banks that bought lots of loans from smaller banks or mortgage brokers. For example, small banks like Washington Mutual, Wachovia, etc. as well as small mortgage lenders sold the financed loans to big banks and mortgages like Countrywide, Fannie Mae, Freddie Mac, etc. 

Collateralized Debt Obligation (CDO)

Collateralized Debt Obligation or CDO consists of portions of various MBS/ABS portfolios. These portfolios are then split and sold as Credit linked notes of varying consistency, risks, and yields. The CDOs are available in a variety of shapes and sizes. The most basic type of CDO is a cash flow CDO and it receives interest payments from loans. On the other hand, CDO Squared is a type of CDO that is made up of different tranches of other CDOs.

Credit Default Swap (CDS)

CDS is a type of insurance and it is quite similar to a PUT Option where the buyer has to pay a premium to the seller. According to the CDS agreement, the seller will receive regular cash payments. On the other hand, the seller of CDS will make the Buyer whole if there is a default.

Advantages Of Bespoke Tranche Opportunity

The main advantage of Bespoke Tranche Opportunity is the investor can customize it. The BTO is a tool that allows the investors to target very particular risk-to-reward profiles and invest in them. For example, if an investor wants to make a large, targeted bet against a specific industry then a dealer will build up a bespoke CDO at the right price. Another advantage of BTO is, it can provide the above-market yields. Therefore, when the credit markets are steady and fixed interest rates are low then the investors can invest more money to dig deeper profits.

Disadvantages Of Bespoke Tranche Opportunity

The biggest disadvantage of BTO is there is no secondary market for bespoke CDOs. Therefore, regular pricing is also very difficult. Because of the lack of demand, the worth of the Tranche must be determined using sophisticated theoretical financial models. However, these theoretical financial models can give an incorrect result and cost the owner lots of money. Moreover, Bespoke Tranche Opportunity lacks transparency and liquidity which is also a major drawback. BTOs also carry a high-risk profile there for it is best for institutional investors than individual investors.

FAQs About What Is A Bespoke Tranche Opportunity

What Is A Bespoke Portfolio?

A bespoke portfolio is a table of reference securities and it serves as the reference portfolio for a synthetic CDO. Usually, the synthetic CDO is arranged by an investment bank and selected by a particular investor or an investment manager.

Do CDOs Still Exist?

Yes, the CDO market still exists because many investors are interested to buy tranches of cash flows. They still believe that they will be able to yield a higher return to their fixed income portfolios!

What Are CDOs Now?

Now CDOs are mostly referred to as a bespoke tranche or a bespoke tranche opportunity (BTO).

Is A BTO The Same As A CDO?

Both BTO and CDO have similarities as well as differences. BTO is created according to the preference of the investor while CDO is created by the bank and then sold in the market.


1. https://businessyield.com/business-strategies/bespoke-tranche-opportunities/
2. https://washingtonindependent.com/bespoke-tranche-opportunities/

Last Updated on October 7, 2022 by Magalie D.

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